Libbey (LBY) 10-Q 2005 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12084

Libbey Inc.

(Exact name of registrant as specified in its charter)

Delaware	34-1559357
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

300 Madison Avenue, Toledo, Ohio 43604

(Address of principal executive offices) (Zip Code)

419-325-2100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value — 13,976,415 shares at October 28, 2005.

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TABLE OF CONTENTS

	PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
	1. Description of the Business
	2. Significant Accounting Policies
	6. Borrowings
	7. Special Charges
	9. Nonpension Postretirement Benefits
	10. Net Income per Share of Common Stock
	11. Employee Stock Benefit Plans
	12. Derivatives
	13. Comprehensive Income
	14. Barter Transactions
	15. Guarantees
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Qualitative and Quantitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 5. Other Information
	Item 6. Exhibits
EXHIBIT INDEX
SIGNATURES
Exhibit 10.1 Amendment No 2 and Waiver to Credit Agreement
Exhibit 10.2 Amendment to the Not Purchase Agreement
Exhibit 10.3 Waiver Agreement
Exhibit 31.1 Certification of CEO Pursuant to Section 302
Exhibit 31.2 Certification of CFO Pursuant to Section 302
Exhibit 32.1 Certification of CEO Pursuant to Section 906
Exhibit 32.2 Certification of CFO Pursuant to Section 906

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying unaudited Condensed Consolidated Financial Statements of Libbey Inc. and all majority owned subsidiaries (Libbey or the Company) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Item 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year-ended December 31, 2005.

The balance sheet at December 31, 2004, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2004.

2

LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per-share amounts)
(unaudited)

	Three months ended September 30,
	2005			2004
Revenues:
Net sales	$	135,573		$	131,790
Freight billed to customers		444			476
Total revenues		136,017			132,266
Cost of sales(1)		108,750			111,919
Gross profit		27,267			20,347
Selling, general and administrative expenses(1)		16,788			15,771
Special charges(1)		487			5,748
Income (loss) from operations		9,992			(1,172	)
Equity loss — pretax		(1,183	)		(914	)
Other income		923			478
Earnings (loss) before interest and income taxes and minority interest		9,732			(1,608	)
Interest expense		3,398			3,175
Income (loss) before income taxes and minority interest		6,334			(4,783	)
Provision (credit) for income taxes		2,090			(1,579	)
Income (loss) before minority interest		4,244			(3,204	)
Minority interest(2)		(77	)		—
Net income (loss)	$	4,167		$	(3,204	)
Net income (loss) per share:
Basic	$	0.30		$	(0.23	)
Diluted	$	0.30		$	(0.23	)
Dividends per share	$	0.10		$	0.10

See accompanying notes

(1)	Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements
(2)	Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements

3

LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per-share amounts)
(unaudited)

	Nine months ended September 30,
	2005			2004
Revenues:
Net sales	$	409,895		$	390,665
Freight billed to customers		1,422			1,531
Total revenues		411,317			392,196
Cost of sales(1)		335,955			316,611
Gross profit		75,362			75,585
Selling, general and administrative expenses(1)		55,109			50,250
Special charges(1)		7,681			5,748
Income from operations		12,572			19,587
Equity loss — pretax		(1,381	)		(847	)
Other income		1,655			1,565
Earnings before interest and income taxes and minority interest		12,846			20,305
Interest expense		10,240			10,267
Income before income taxes and minority interest		2,606			10,038
Provision for income taxes		860			3,312
Income before minority interest		1,746			6,726
Minority interest(2)		(98	)		—
Net income	$	1,648		$	6,726
Net income per share:
Basic	$	0.12		$	0.49
Diluted	$	0.12		$	0.49
Dividends per share	$	0.30		$	0.30

See accompanying notes

(1)	Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements
(2)	Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements

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LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)

	September 30,			December 31,			September 30,
	2005			2004			2004
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash	$	1,242		$	6,244		$	1,488
Accounts receivable — net		75,122			67,522			66,863
Inventories — net		147,848			126,625			141,366
Deferred taxes		8,847			7,462			7,402
Prepaid and other current assets		18,660			3,308			6,476
Total current assets		251,719			211,161			223,595
Other assets:
Repair parts inventories		7,126			6,965			6,579
Intangible pension asset		22,140			22,140			15,512
Software — net		4,492			3,301			3,208
Other assets		6,257			4,131			3,273
Investments		81,271			82,125			87,123
Purchased intangible assets — net		14,576			12,314			12,166
Goodwill — net		56,281			53,689			53,052
Total other assets		192,143			184,665			180,913
Property, plant and equipment — net		204,608			182,378			174,578
Total assets	$	648,470		$	578,204		$	579,086
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable	$	15,748		$	9,415		$	19,308
Accounts payable		53,551			43,140			39,594
Salaries and wages		14,809			13,481			13,262
Accrued liabilities		25,604			25,515			23,124
Deposit liability		16,623			16,623			—
Special charges reserve		3,029			3,025			2,982
Income taxes		7,650			5,839			4,147
Long-term debt due within one year		243,857			115			115
Total current liabilities		380,871			117,153			102,532
Long-term debt		5,829			215,842			231,947
Deferred taxes		13,252			12,486			15,528
Pension liability		43,741			36,466			26,513
Nonpension postretirement benefits		45,882			45,716			46,805
Other long-term liabilities		6,628			6,978			6,300
Total liabilities		496,203			434,641			429,625
Minority interest		98			—			—
Total liabilities including minority interest		496,301			434,641			429,625
Shareholders’ equity:
Common stock, par value $.01 per share, 50,000,000 shares authorized, 18,689,710 shares issued (18,685,210 shares issued in 2004)		187			187			187
Capital in excess of par value		301,025			300,922			300,916
Treasury stock, at cost, 4,725,941 shares (4,879,310 shares issued in 2004)		(133,049	)		(135,865	)		(136,466	)
Retained earnings		4,403			6,925			6,778
Accumulated other comprehensive loss		(20,397	)		(28,606	)		(21,954	)
Total shareholders’ equity		152,169			143,563			149,461
Total liabilities and shareholders’ equity	$	648,470		$	578,204		$	579,086

See accompanying notes

5

LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

	Three months ended September 30,
	2005			2004
Operating activities:
Net income (loss)	$	4,167		$	(3,204	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		9,160			7,027
Equity loss — net of tax		791			475
Minority interest		77			—
Change in accounts receivable		(2,685	)		(3,373	)
Change in inventories		(11,773	)		(6,769	)
Change in accounts payable		11,516			4,520
Loss on sale of assets		315			—
Special charges		487			11,734
Special charges cash payments		(2,843	)		(17	)
Other operating activities		(7,957	)		(11,754	)
Net cash provided by (used in) operating activities		1,255			(1,361	)
Investing activities:
Additions to property, plant and equipment		(7,389	)		(11,598	)
Dividends from equity investments		—			980
Proceeds from sale of assets		223			—
Net cash used in investing activities		(7,166	)		(10,618	)
Financing activities:
Net bank credit facility activity		3,030			7,380
Other net borrowings		3,514			4,971
Stock options exercised		—			163
Dividends		(1,394	)		(1,375	)
Other		(537	)		(27	)
Net cash provided by financing activities		4,613			11,112
Decrease in cash		(1,298	)		(867	)
Cash at beginning of period		2,540			2,355
Cash at end of period	$	1,242		$	1,488
Supplemental disclosure of cash flows information:
Cash paid during the quarter for interest	$	2,448		$	1,761
Cash paid (net of refunds received) during the quarter for income taxes	$	(50	)	$	118

See accompanying notes

6

LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

	Nine months ended September 30,
	2005			2004
Operating activities:
Net income	$	1,648		$	6,726
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25,611			22,470
Equity loss — net of tax		967			348
Minority interest		98			—
Change in accounts receivable		(4,382	)		(10,431	)
Change in inventories		(16,284	)		(15,836	)
Change in accounts payable		3,630			2,341
Loss on sale of assets		294			—
Special charges		9,895			11,734
Special charges cash payments		(8,739	)		(17	)
Other operating activities		8			(7,564	)
Net cash provided by operating activities		12,746			9,771
Investing activities:
Additions to property, plant and equipment		(26,503	)		(28,624	)
Dividends from equity investments		—			980
Proceeds from sale of assets		223			—
Crisal acquisition and related costs		(28,990	)		—
Net cash used in investing activities		(55,270	)		(27,644	)
Financing activities:
Net bank credit facility activity		35,910			2,380
Other net borrowings		6,227			18,709
Stock options exercised		99			491
Dividends		(4,162	)		(4,103	)
Other		(552	)		(865	)
Net cash provided by financing activities		37,522			16,612
Effect of exchange rate fluctuations on cash		—			(1	)
Decrease in cash		(5,002	)		(1,262	)
Cash at beginning of period		6,244			2,750
Cash at end of period	$	1,242		$	1,488
Supplemental disclosure of cash flows information:
Cash paid during the period for interest	$	8,726		$	9,289
Cash paid (net of refunds received) during the period for income taxes	$	5,198		$	1,428

See accompanying notes

7

LIBBEY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share data
(unaudited)

1. Description of the Business

Libbey is the leading supplier of tableware products in the U.S. and Canada, in addition to supplying other key export markets. We operate in one business segment: tableware products. Established in 1818, we have the largest manufacturing, distribution and service network among North American glass tableware manufacturers. We design and market an extensive line of high-quality glass tableware, ceramic dinnerware, metal flatware, holloware and serveware, and plastic items to a broad group of customers primarily in the foodservice, retail and industrial markets. We also import and distribute various products and have a 49% interest in Vitrocrisa Holding, S. de R.L. de C.V. and related companies (Vitrocrisa), the largest glass tableware manufacturer in Latin America, based in Monterrey, Mexico.

We own and operate two domestic glass tableware manufacturing plants, one in Ohio and one in Louisiana; glass tableware manufacturing plants in the Netherlands and in Portugal; a ceramic dinnerware plant in New York; and a foodservice plastics manufacturing plant in Wisconsin. In addition, we import products from overseas in order to complement our line of manufactured items. The combination of manufacturing and procurement, and our investment in Vitrocrisa, allows us to compete in the tableware market by offering an extensive product line at competitive prices.

Our website can be found atwww.libbey.com. We make available, free of charge, at this website all of our reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, as well as amendments to those reports. These reports are made available on the website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission.

2. Significant Accounting Policies

See our Form 10-K for the year-ended December 31, 2004 for a description of significant accounting policies not listed below.

Basis of PresentationThe Condensed Consolidated Financial Statements include Libbey Inc. and its majority-owned subsidiaries (Libbey or the Company). Our fiscal year end is December 31. We record our 49% interest in Vitrocrisa using the equity method. At September 30, 2005, we owned 95% of Crisal-Cristalaria Automática S.A. (Crisal). Our 95% controlling interest requires that Crisal’s operations be consolidated in the Condensed Consolidated Financial Statements. The 5% equity interest of Crisal that is not owned by us is shown as a minority interest in the Condensed Consolidated Financial Statements. All material intercompany accounts and transactions have been eliminated. The preparation of financial statements and related disclosures in conformity with United States generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from management’s estimates.

8

Condensed Consolidated Statements of OperationsNet sales in our Condensed Consolidated Statements of Operations include revenue earned when products are shipped and title and risk of loss has passed to the customer. Revenue is recorded net of returns, discounts and incentives offered to customers. Cost of sales includes cost to manufacture and/or purchase products, warehousing, shipping and delivery costs, royalty expense and other costs.

ReclassificationsCertain amounts in prior years’ financial statements have been reclassified to conform to the presentation used in the period ended September 30, 2005.

New Accounting Standards

In January 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 106-1,“Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP No. 106-1), which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). In May 2004, the FASB issued FSP No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-2). FSP 106-2 supersedes FAS No. 106-1. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. FSP 106-2 provides authoritative guidance on the accounting for the Act and specifies the disclosure requirements for employers who have adopted FSP 106-2. Up until the third quarter of 2005, we had elected to defer accounting for the effects of the Act pending clarification of the Act on our nonpension postretirement plans. Now, in the third quarter of 2005, with guidance from the Centers for Medicare and Medicaid Services, we have determined the effects of the Act on our nonpension postretirement plans and included them in our Condensed Consolidated Financial Statements. See Note 9.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123 Revised). This is an amendment to SFAS No. 123, “Accounting for Stock-Based Compensation.” This new standard requires share-based compensation transactions to be accounted for using a fair-value-based method and the resulting cost to be recognized in our financial statements. This new standard is effective beginning January 1, 2006. We are currently evaluating SFAS No. 123 Revised and intend to implement it in the first quarter of 2006. We do not presently have an estimate of its effect on our financial statements.

The FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” This statement clarifies the requirement that abnormal inventory-related costs be recognized as current-period charges and requires that the allocation of fixed production overhead costs to inventory conversion costs be based on the normal capacity of the production facilities. The provisions of this statement are to be applied prospectively to inventory costs incurred during fiscal years beginning after June 15, 2005. We do not presently expect the effects of adoption to be significant.

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3. Balance Sheet Details

The following tables provide detail of selected balance sheet items:

	September 30,		December 31,		September 30,
	2005		2004		2004
Accounts receivable:
Trade receivables	$	72,194	$	64,744	$	63,003
Other receivables		2,928		2,778		3,860
Total accounts receivable, less allowances of $8,123, $7,661 and $6,343	$	75,122	$	67,522	$	66,863
Inventories:
Finished goods	$	136,185	$	115,691	$	129,398
Work in process		5,197		6,017		6,635
Raw materials		5,932		4,109		4,433
Operating supplies		534		808		900
Total inventories, less allowances and LIFO reserve of $17,725, $17,779 and $17,722	$	147,848	$	126,625	$	141,366
Prepaid and other current assets:
Prepaid expenses	$	4,074	$	3,147	$	4,266
Derivative assets		13,236		161		2,210
Capitalized site demolition cost		1,350		—		—
Total prepaid and other current assets	$	18,660	$	3,308	$	6,476
Other assets:
Deposits	$	1,448	$	1,661	$	1,473
Finance fees — net of amortization		2,191		2,002		1,575
Other		2,618		468		225
Total other assets	$	6,257	$	4,131	$	3,273
Accrued liabilities:
Accrued incentives	$	8,027	$	12,881	$	9,229
Workers compensation & medical liabilities		5,513		4,318		4,181
Interest		3,102		1,538		2,584
Derivative liabilities		161		1,375		2,032
Commissions payable		774		756		754
Accrued non-income taxes		836		83		(247	)
Other		7,191		4,564		4,591
Total accrued liabilities	$	25,604	$	25,515	$	23,124
Other long-term liabilities:
Deferred liability	$	908	$	689	$	1,198
Guarantee of Vitrocrisa debt		421		421		421
Other		5,299		5,868		4,681
Total other long-term liabilities	$	6,628	$	6,978	$	6,300

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4. Acquisitions

On January 10, 2005, we purchased 95 percent of the shares of Crisal-Cristalaria Automática S.A. (Crisal) located in Marinha Grande, Portugal, from Vista Alegre Atlantis SGPS, SA. The cash transaction was valued at approximately€28 million. Pursuant to the agreement, we will acquire the remaining shares of Crisal for approximately€2 million approximately three years after the closing date, provided that Crisal meets a specified target relating to earnings before interest, taxes, depreciation and amortization (EBITDA). The agreement provides that, if Crisal does not meet the specified target, we will acquire the remaining shares of Crisal for one euro. In addition, the agreement provides that, if Crisal meets other specified EBITDA and net sales targets, we will pay the seller an earn-out payment in the amount of€5.5 million no earlier than three years after the closing date of January 10, 2005. In the event that any contingent payments are made according to the agreement, the payments will be reflected as additional purchase price.

Crisal manufactures and markets glass tableware, mainly tumblers, stemware and glassware accessories, and the majority of its sales are in Portugal and Spain. This acquisition of another European glassware manufacturer is complementary to our 2002 acquisition of Royal Leerdam, a maker of fine European glass stemware. Royal Leerdam’s primary markets are located in countries in northern Europe. These acquisitions are consistent with our external growth strategy to be a supplier of high-quality, machine-made glass tableware products to key markets worldwide.

The following allocation of the purchase price for the Crisal acquisition is based on preliminary data and will change when the results of the valuation of inventory, fixed assets and certain identifiable intangible assets are finalized. We expect to finalize the purchase price allocations during the fourth quarter of 2005:

Current assets	$	13,215
Property, plant and equipment		31,754
Other assets		1
Intangible assets		4,187
Goodwill		3,770
Total assets acquired		52,927
Less liabilities assumed:
Current liabilities		18,551
Long-term liabilities		5,386
Total liabilities assumed		23,937
Cash purchase price	$	28,990

Crisal’s results of operations are included in our Condensed Consolidated Financial Statements as of January 11, 2005. Pro forma results for both the prior-year period and the period from January 1 through January 10, 2005, are not included, as they are considered immaterial.

In late July 2005, we announced that we are pursuing the possible purchase of the remaining 51 percent of the shares of Vitrocrisa from Vitro S.A. We are still pursuing this possible purchase. Vitrocrisa is currently a joint venture between Libbey and Vitro S.A., with Libbey owning 49 percent of the shares and Vitro S.A. owning 51 percent of the shares. See Note 5.

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5. Investments in Unconsolidated Affiliates

We are a 49% equity owner in Vitrocrisa Holding, S. de R.L. de C.V. and related companies (Vitrocrisa), which manufacture, market and sell glass tableware (beverageware, plates, bowls, serveware and accessories) and industrial glassware (coffee pots, blender jars, meter covers, glass covers for cooking ware and lighting fixtures sold to original equipment manufacturers). We record our 49% interest in Vitrocrisa Holding, S. de R.L. de C.V. and related companies using the equity method.

Condensed balance sheet information for Vitrocrisa Holding, S. de R.L. de C.V. and subsidiaries, Crisa Libbey, S.A. de C.V. and Crisa Industrial, L.L.C. (including adjustments for U.S. GAAP) is as follows:

	September 30,		December 31,		September 30,
	2005		2004		2004
Current assets	$	92,881	$	88,195	$	87,658
Non-current assets		95,708		100,274		99,070
Total assets		188,589		188,469		186,728
Current liabilities		80,341		69,426		60,528
Non-current liabilities		86,727		93,962		98,699
Total liabilities		167,068		163,388		159,227
Net assets	$	21,521	$	25,081	$	27,501

Condensed statements of operations for Vitrocrisa Holding, S. de R.L. de C.V. and subsidiaries, Crisa Libbey, S.A. de C.V. and Crisa Industrial, L.L.C. (including adjustments for U.S. GAAP) are as follows:

Three months ended September 30,	2005			2004
Total revenues	$	46,937		$	49,521
Cost of sales		41,469			42,795
Gross profit		5,468			6,726
Selling, general and administrative expenses		5,689			5,723
(Loss) income from operations		(221	)		1,003
Remeasurement loss		69			387
Other expense		109			247
(Loss) earnings before interest and taxes		(399	)		369
Interest expense		2,016			2,235
Loss before income taxes		(2,415	)		(1,866	)
Income taxes		(501	)		(702	)
Net loss	$	(1,914	)	$	(1,164	)

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Nine months ended September 30,	2005			2004
Total revenues	$	141,469		$	140,490
Cost of sales		119,298			120,384
Gross profit		22,171			20,106
Selling, general and administrative expenses		17,017			16,739
Income from operations		5,154			3,367
Remeasurement loss		876			60
Other expense		879			370
Earnings before interest and taxes		3,399			2,937
Interest expense		6,217			4,665
Loss before income taxes		(2,818	)		(1,728	)
Income taxes		(845	)		(822	)
Net loss	$	(1,973	)	$	(906	)

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6. Borrowings

Borrowings consist of the following:

	Interest				September 30,		December 31,		September 30,
	Rate		Maturity Date		2005		2004		2004
Borrowings under credit facility		floating		June 24,2009	$	143,032	$	113,690	$	129,761
Senior notes		3.69%	March 31,2008			25,000		25,000		25,000
Senior notes		5.08%		March 31,2013		55,000		55,000		55,000
Senior notes		floating		March 31,2010		20,000		20,000		20,000
Promissory note		6.00%		September 2005 to
				September 2016		2,166		2,267		2,301
Notes payable		floating		September 2005		15,748		9,415		19,308
Obligations under capital leases		4.36%		September 2005 to
			May 2007			2,401		—		—
Other debt		4.00%	September 2009			2,087		—		—
Total borrowings						265,434		225,372		251,370
Less — current portion of borrowings						259,605		9,530		19,423
Total long-term portion of borrowings					$	5,829	$	215,842	$	231,947

We were in compliance with all debt agreement covenants as of September 30, 2005, December 31, 2004, and September 30, 2004.

Some of the above borrowings require maintenance of certain financial covenants. On September 30, 2005, as previously reported in our Form 8-K filed October 4, 2005, we amended the terms of our Revolving Credit Facility (Facility) and our Senior Notes. The amendment temporarily reduced the Facility from $250 million to $195 million for the period September 30 to December 30, 2005, and increased the leverage ratio covenants under both the Facility and the Senior Notes from 3.50 to 1.00 to 4.25 to 1.00 at September 30, 2005. The amendment also provided for the waiver by the lenders of the leverage ratio covenant for the period from October 1, 2005, to December 29, 2005. At December 30, 2005, the leverage ratio covenant will return to 3.50 to 1.00. Based upon our forecast for the fourth quarter 2005, we expect to have a leverage ratio in excess of 3.50 to 1. Because we currently do not have further waivers or amendments of, or commitments to refinance these agreements, the borrowings under these agreements are classified as short term at September 30, 2005. However, we expect to refinance or amend these agreements in the fourth quarter of 2005 and are in the process of pursuing such amendments or financing commitments.

Revolving Credit Facility

In June 2004, Libbey Glass Inc. and Libbey Europe B.V. entered into an Amended and Restated Revolving Credit Agreement (Revolving Credit Agreement or Agreement) with a group of banks that provides for an unsecured Revolving Credit and Swing Line Facility (Facility). We entered into amendments to the Agreement in December 2004 and September 2005 (as described above). The Agreement permits borrowings up to an aggregate total of $195 million from September 30 to December 30, 2005, and $250 million thereafter, maturing June 24, 2009. Swing Line borrowings are limited to $25 million. Swing Line U.S. dollar borrowings bear interest calculated at the prime rate plus the Applicable Rate for Base Rate Loans, as defined in the Agreement. Revolving Credit Agreement U.S. dollar borrowings bear interest, at our option, at either the prime rate plus the Applicable Rate for Base Rate Loans or a Eurodollar rate plus the Applicable Rate for Eurodollar Loans, as defined in the Agreement. The Applicable Rates for Base Rate Loans and Eurodollar Loans vary depending on our performance against certain

14

financial ratios. The Applicable Rates for Base Rate Loans and Eurodollar Loans were 0.35% and 1.35%, respectively, at September 30, 2005. The weighted average annual interest rate on these borrowings at September 30, 2005, was 4.3%.

Libbey Europe B.V. may have euro-denominated swing line or revolving borrowings under the Revolving Credit Agreement in an aggregate amount not to exceed the Offshore Currency Equivalent, as defined in the Revolving Credit Agreement, of $125 million. Offshore Currency Swing Line borrowings are currently limited to $15 million of the $25 million total Swing Line borrowings permitted under the Agreement. Interest is calculated at the Offshore Currency Swing Line rate plus the Applicable Rate for Swing Line Loans in euros. Revolving Offshore Currency Borrowings bear interest at the Offshore Currency Rate plus the Applicable Rate for Offshore Currency Rate Loans, as defined in the Agreement. The Applicable Rates for Swing Line Loans in euros and Offshore Currency Rate Loans vary depending on our performance against certain financial ratios. The Applicable Rates for Swing Line Loans in euros and Offshore Currency Rate Loans were 1.85% and 1.35%, respectively, at September 30, 2005.

Under the Agreement, we may also elect to borrow up to a maximum of $125 million under a Negotiated Rate Loan alternative at negotiated rates of interest. The Agreement also provides for the issuance of $30 million of letters of credit, which are applied against the $195 million limit. At September 30, 2005, we had $8.4 million in letters of credit outstanding under the Facility.

We pay a Facility Fee, as defined in the Agreement, on the total credit provided under the Facility. The Facility Fee varies depending on our performance against certain financial ratios. The Facility Fee was 0.4% at September 30, 2005.

No compensating balances are required by the Agreement. The Agreement does require the maintenance of certain financial ratios, restricts the incurrence of indebtedness and other contingent financial obligations, and restricts certain types of business activities and investments.

Senior Notes

We issued $100 million of privately placed senior notes in March 2003. Eighty million dollars of the notes have an average annual interest rate of 4.65%, with an initial average maturity of 8.4 years and a remaining average maturity of 5.6 years. Twenty million dollars of the senior notes have a floating interest rate at a margin over the London Interbank Offer Rate (LIBOR) that is set quarterly. The floating interest rate at September 30, 2005, on the $20 million debt was 4.54% per year.

Promissory Note

In September 2001, we issued a $2.7 million promissory note in connection with the purchase of our Laredo, Texas, warehouse facility. At September 30, 2005, December 31, 2004 and September 30, 2004; we had $2.2 million, $2.3 million, and $2.3 million outstanding on the promissory note, respectively.

Obligations Under Capital Leases

We lease certain machinery and equipment under agreements that are classified as capital leases. These leases were acquired in the Crisal acquisition (see Note 4). The cost of the equipment under capital leases is included in the Condensed Consolidated Balance Sheet as property, plant and equipment and the related depreciation expense is included in the Condensed Consolidated Statements of Operations.

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The future minimum lease payments required under the capital leases as of September 30, 2005, are as follows:

	Payments Due by Period
	Total		1 Year		2-3 Years		4-5 Years
Capital leases	$	2,401	$	670	$	1,316	$	415

Interest Rate Protection Agreements

We have Interest Rate Protection Agreements (Rate Agreements) with respect to $25 million of debt to manage our exposure to fluctuating interest rates. The Rate Agreements effectively convert $25 million of our borrowings from variable rate debt to fixed-rate debt, thus reducing the impact of interest rate changes on future income. The fixed interest rate for our borrowings related to the Rate Agreements at September 30, 2005, excluding applicable fees, was 5.3% per year and the total interest rate, including applicable fees, was 7.1% per year. The average maturity of these Rate Agreements was 0.9 years at September 30, 2005. Total remaining debt not covered by the Rate Agreements with fluctuating interest rates has a weighted average rate of 4.2% per year at September 30, 2005. If the counterparties to these Rate Agreements were to fail to perform, these Rate Agreements would no longer protect us from interest rate fluctuations. However, we do not anticipate nonperformance by the counterparties.

The fair market value of the Rate Agreements at September 30, 2005, was $(0.2) million. The fair value of the Rate Agreements is based on the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves. We do not expect to cancel these agreements prior to their expiration dates.

7. Special Charges

Capacity Realignment

In August 2004, we announced that we were realigning our production capacity in order to improve our cost structure. In mid-February 2005, we ceased operations at our manufacturing facility in City of Industry, California, and began realignment of production among our other domestic glass manufacturing facilities.

We recorded a pretax charge of $0.5 million in the third quarter of 2005 and $4.3 million in the first nine months of 2005 related to the closure of the City of Industry facility and realignment of our production capacity. These charges were primarily for employee termination and other costs. During the third and fourth quarters of 2004, we incurred a pretax charge of $14.5 million related to the closure of the City of Industry facility and realignment of our production capacity.

In December 2004, we sold approximately 27 acres of property in City of Industry, California, for net proceeds of $16.6 million. Pursuant to the purchase agreement, the buyer has leased the property back to us in order to enable us to cease operations, to relocate certain equipment to our other glassware manufacturing facilities, to demolish the buildings on the property and to perform related site work, as required by the purchase agreement. Demolition of all above-ground structures has been completed, and we are taking the final steps to demolish subsurface utility lines, to grade the property and to confirm that all environmental remediation that we were

16

required to perform in fact has been performed as required. We anticipate that these steps will be completed on or before December 31, 2005.

The annual base rent payable under the lease is $1 (one dollar) until December 31, 2005. As stated above, we anticipate that the demolition, site work and remediation will be completed, and the lease terminated, on or before December 31, 2005. If, however, this work is not completed by December 31, 2005, the monthly lease payment increases to $0.2 million.

Because the risks and rewards of ownership have not been unconditionally transferred to the buyer at September 30, 2005, and the property site development activities have not been completed, we continue to carry the land and building on our Condensed Consolidated Balance Sheet. The cash received in December 2004 was recorded as a deposit liability at December 31, 2004. The cost of demolition of the buildings and related site work was estimated by an independent third party to be between $4 and $6 million. We have been capitalizing these costs in 2005 because we ultimately expect to recover these development costs and the net book value of the land and building of $8.4 million. Assuming our estimated site preparation costs are reasonably accurate, we expect to recognize a gain, in the fourth quarter of 2005, equal to the excess of the deposit received over the net book value of the land and building, including the capitalized site development costs.

The following table summarizes the capacity realignment charge incurred through September 30, 2005:

	Year ended		Three months ended		Nine months ended		Total estimated
	December 31, 2004		September 30, 2005		September 30, 2005		charge
Pension & postretirement welfare	$	4,621	$	—	$	—	$	4,621
Inventory write-down		1,905		—		—		1,905
Included in cost of sales		6,526		—		—		6,526
Fixed asset relocation costs		4,678		130		650		5,300
Net gain on land sale		—		—		—		(2,600	)
Employee termination costs & other		3,315		357		3,681		7,500
Included in special charges		7,993		487		4,331		10,200
Total pretax capacity realignment charge	$	14,519	$	487	$	4,331	$	16,726

The following reflects the balance sheet activity related to the capacity realignment for the three months ended September 30, 2005:

	Balance at			Total charge to					Inventory						Balance at
	June 30, 2005			earnings		Cash payments			disposition			Non-cash utilization			September 30, 2005
Pension & postretirement welfare	$	—		$	—	$	—		$	—		$	—		$	—
Inventory write-down		458			—		—			(458	)		—			—
Land proceeds received		16,623			—		—			—			—			16,623
Capitalized site demolition costs		(352	)		—		(998	)		—			—			(1,350	)
Fixed asset relocation costs		—			130		(130	)		—			—			—
Employee termination costs & other		1,142			357		(801	)		—			(146	)		552
Total	$	17,871		$	487	$	(1,929	)	$	(458	)	$	(146	)	$	15,825

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The following reflects the balance sheet activity related to the capacity realignment for the nine months ended September 30, 2005:

	Balance at		Total charge to					Inventory						Balance at
	December 31, 2004		earnings		Cash payments			disposition			Non-cash utilization			September 30, 2005
Pension & postretirement welfare	$	—	$	—	$	—		$	—		$	—		$	—
Inventory write-down		1,517		—		—			(1,517	)		—			—
Land proceeds received		16,623		—		—			—			—			16,623
Capitalized site demolition costs		—		—		(1,350	)		—			—			(1,350	)
Fixed asset relocation costs		—		650		(650	)		—			—			—
Employee termination costs & other		3,025		3,681		(5,825	)		—			(329	)		552
Total	$	21,165	$	4,331	$	(7,825	)	$	(1,517	)	$	(329	)	$	15,825

Balance sheet classification is as follows: $16.6 million is included in deposit liability, $(1.4) million is included in other assets and $0.6 million is included in the line item special charges reserve on the Condensed Consolidated Balance Sheet.

Salary Reduction Program

In the second quarter of 2005, we reduced our North American salaried workforce by seven percent, or approximately 50 employees, in order to reduce our overall costs. This resulted in a pretax charge of $5.6 million in the second quarter of 2005.

The following table summarizes the salary reduction charge incurred through September 30, 2005:

	Three months
	ended September 30,		Nine months ended		Total estimated
	2005		September 30, 2005		charge
Pension & postretirement welfare	$	—	$	867	$	867
Included in cost of sales		—		867		867
Pension & postretirement welfare		—		1,347		1,347
Included in selling, general and administrative expenses		—		1,347		1,347
Employee termination costs		—		3,350		3,350
Included in special charges		—		3,350		3,350
Total pretax salary reduction charge	$	—	$	5,564	$	5,564

The pension and postretirement welfare expenses are further explained in Notes 8 and 9.

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The following reflects the balance sheet activity related to the salary reduction program for the three months ended September 30, 2005:

	Balance at		Total							Balance at
	June 30,		charge to		Cash			Non-cash		September 30,
	2005		earnings		payments			utilization		2005
Pension & postretirement welfare	$	—	$	—	$	—		$	—	$	—
Employee termination costs & other		3,350		—		(914	)		—		2,436
Total	$	3,350	$	—	$	(914	)	$	—	$	2,436

The following reflects the balance sheet activity related to the salary reduction program for the nine months ended September 30, 2005:

	Balance at		Total								Balance at
	January 1,		charge to		Cash			Non-cash			September 30,
	2005		earnings		payments			utilization			2005
Pension & postretirement welfare	$	—	$	2,214	$	—		$	(2,214	)	$	—
Employee termination costs & other		—		3,350		(914	)		—			2,436
Total	$	—	$	5,564	$	(914	)	$	(2,214	)	$	2,436

The employee termination costs and other of $2.4 million are included in the line item special charges reserve on the Condensed Consolidated Balance Sheet.

Summary of Special Charges

The following table summarizes the capacity realignment and salary reduction program charges and their classifications on the Condensed Consolidated Statements of Operations:

	Three months ended		Nine months ended
	September 30, 2005		September 30, 2005
Cost of sales	$	—	$	867
Selling, general and administrative expenses		—		1,347
Special charges		487		7,681
Total special charges	$	487	$	9,895

8. Pension

We have pension plans covering the majority of our employees. Benefits generally are based on compensation and length of service for salaried employees and job grade and length of service for hourly employees. Our policy is to fund pension plans such that sufficient assets will be available to meet future benefit requirements. In addition, we have a supplemental employee retirement plan (SERP) covering certain employees. The U.S. pension plans, including the SERP, which is an unfunded liability, cover the hourly and salaried U.S.-based employees of Libbey. The non-U.S. pension plans cover the employees of our wholly owned subsidiaries, Royal Leerdam and Leerdam Crystal, both located in the Netherlands.

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Effect on Operations

The components of our net pension expense (credit), including the SERP, are as follows:

	U.S. Plans						Non-U.S. Plans						Total
Three months ended
September 30,	2005			2004			2005			2004			2005			2004
Service cost	$	1,548		$	1,388		$	236		$	151		$	1,784		$	1,539
Interest cost		3,545			3,449			405			384			3,950			3,833
Expected return on plan assets		(4,239	)		(4,415	)		(545	)		(456	)		(4,784	)		(4,871	)
Amortization of unrecognized:
Prior service cost		410			348			(99	)		(90	)		311			258
Gain		773			188			—			—			773			188
Curtailment charge		—			3,962			—			—			—			3,962
Pension expense (credit)	$	2,037		$	4,920		$	(3	)	$	(11	)	$	2,034		$	4,909

	U.S. Plans						Non-U.S. Plans						Total
Nine months ended
September 30,	2005			2004			2005			2004			2005			2004
Service cost	$	4,897		$	4,425		$	708		$	453		$	5,605		$	4,878
Interest cost		10,680			10,437			1,218			1,152			11,898			11,589
Expected return on plan assets		(12,781	)		(14,045	)		(1,635	)		(1,368	)		(14,416	)		(15,413	)
Amortization of unrecognized:
Prior service cost		1,545			1,092			(297	)		(270	)		1,248			822
Gain		2,046			473			—			—			2,046			473
Curtailment charge		1,614			3,962			—			—			1,614			3,962
Pension expense (credit)	$	8,001		$	6,344		$	(6	)	$	(33	)	$	7,995		$	6,311

In the second quarter of 2005, we incurred a pension curtailment charge of $1.6 million as a result of a planned reduction in our North American salaried workforce of approximately 50 employees. Due to the reduction of the salaried workforce, the U.S. pension plans were revalued as of June 30, 2005. At this time, the discount rate was reduced from 5.75% to 5.00%. This revaluation resulted in additional net periodic benefit cost of $0.2 million in the second quarter of 2005, which is included in the above table. The normal measurement date of the U.S. and non-U.S. plans is December 31. The salary reduction program is explained in further detail in Note 7.

During the third quarter of 2004, Libbey incurred a pension curtailment charge of $4.0 million as a result of the planned capacity realignment whereby our manufacturing facility in City of Industry, California, ceased operations in February 2005. As a result of the plant closure, approximately 140 employees were terminated. In addition, due to the announcement of the closure of the City of Industry plant, the valuation of the U.S. pension plan was revalued as of August 16, 2004. This resulted in additional net periodic benefit cost of $0.2 million in the third quarter of 2004. This amount is included in the above table. The capacity realignment is explained in further detail in Note 7.

We expect to contribute $0 to our U.S. pension plans and $1.6 million to our non-U.S. plans in 2005. Through the third quarter of 2005, there have been no contributions to the U.S. plans and contributions totaling $1.2 million to the non-U.S. plans.

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9. Nonpension Postretirement Benefits

We provide certain retiree health care and life insurance benefits covering a majority of our salaried and hourly employees. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. Benefits for most hourly retirees are determined by collective bargaining. The U.S. nonpension postretirement plans cover the hourly and salaried U.S.-based employees of Libbey. The non-U.S. nonpension postretirement plans cover the retirees and active employees of Libbey who are located in Canada. Under a cross-indemnity agreement, Owens-Illinois, Inc. assumed liability for the nonpension postretirement benefits of Libbey retirees who had retired as of June 24, 1993.

Effect on Operations

The provision for our nonpension postretirement benefit expense consists of the following:

	U.S. Plans						Non-U.S. Plans						Total
Three months ended September 30,	2005			2004			2005			2004			2005			2004
Service cost	$	219		$	179		$	—		$	—		$	219		$	179
Interest cost		449			585			37			36			486			621
Amortization of unrecognized:
Prior service cost		(223	)		(455	)		—			—			(223	)		(455	)
Gain (loss)		(99	)		(38	)		(2	)		(4	)		(101	)		(42	)
Curtailment charge		—			(152	)		—			—			—			(152	)
Nonpension postretirement benefit expense	$	346		$	119		$	35		$	32		$	381		$	151

	U.S. Plans						Non-U.S. Plans						Total
Nine months ended September 30,	2005			2004			2005			2004			2005			2004
Service cost	$	660		$	631		$	—		$	—		$	660		$	631
Interest cost		1,531			1,591			111			113			1,642			1,704
Amortization of unrecognized:
Prior service cost		(663	)		(1,413	)		—			—			(663	)		(1,413	)
Gain (loss)		(15	)		(51	)		(17	)		(8	)		(32	)		(59	)
Curtailment charge		304			(152	)		—			—			304			(152	)
Nonpension postretirement benefit expense	$	1,817		$	606		$	94		$	105		$	1,911		$	711

In the second quarter of 2005, we incurred a nonpension postretirement curtailment charge of $0.3 million as a result of a planned reduction in our North American salaried workforce of approximately 50 employees. Due to the reduction of the salaried workforce, the U.S. postretirement plans were revalued as of June 30, 2005. At this time, the discount rate was reduced from 5.75% to 5.00%. This revaluation resulted in additional net periodic benefit cost of $0.1 million in the second quarter of 2005, which is included in the above table. The normal measurement date of the U.S. and non-U.S. plans is December 31. The salary reduction program is explained in further detail in Note 7.

During the third quarter of 2004, Libbey incurred a nonpension postretirement curtailment income of $0.2 million as a result of the planned capacity realignment whereby the

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manufacturing facility in City of Industry, California, ceased operations in February 2005. As a result of the plant closure, approximately 140 employees were terminated. In addition, due to the announcement of the closure of the City of Industry plant, the valuation of the U.S. postretirement plan was revalued as of August 16, 2004. This resulted in additional net periodic benefit cost of $0.1 million in the third quarter of 2004. This amount is included in the above table. The normal measurement date for the U.S. plans is December 31. The capacity realignment is explained in further detail in Note 7.

In the third quarter of 2005, we determined the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) on our nonpension postretirement plans and included them in our Condensed Consolidated Financial Statements. Inclusion resulted in an annual reduction in expense of $0.3 million, of which $0.2 million was recorded during the third quarter 2005, for the nonpension postretirement plans. The Act is explained in further detail in Note 2.

10. Net Income per Share of Common Stock

The following table sets forth the computation of basic and diluted earnings per share:

Three months ended September 30,	2005		2004
Numerator for basic and diluted earnings per share—net income (loss) which is available to common shareholders	$	4,167	$	(3,204	)
Denominator for basic earnings per share—weighted-average shares outstanding		13,947,861		13,749,659
Effect of dilutive securities—employee stock options and employee stock purchase plan (ESPP)(1)		2,780		—
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		13,950,641		13,749,659
Basic earnings (loss) per share	$	0.30	$	(0.23	)
Diluted earnings (loss) per share	$	0.30	$	(0.23	)

⁽¹⁾ The effect of employee stock options and the employee stock purchase plan (ESPP), 2,555 shares for the quarter ended September 30, 2004, were anti-dilutive and thus not included in the earnings per share calculation.

Nine months ended September 30,	2005		2004
Numerator for basic and diluted earnings per share—net income which is available to common shareholders	$	1,648	$	6,726
Denominator for basic earnings per share—weighted-average shares outstanding		13,878,877		13,685,759
Effect of dilutive securities—employee stock options and employee stock purchase plan (ESPP)		999		11,981
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		13,879,876		13,697,740
Basic earnings per share	$	0.12	$	0.49
Diluted earnings per share	$	0.12	$	0.49

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Diluted shares outstanding include the dilutive impact of in-the-money options, which are calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the tax-affected proceeds that would be hypothetically received from the exercise of all in-the-money options are assumed to be used to repurchase shares.

11. Employee Stock Benefit Plans

We have two stock-based employee compensation plans. We account for the plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related Interpretations. No stock-based employee compensation cost is reflected in net income for stock options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. We also have issued restricted shares under the stock option plan. Restricted shares are issued at no cost to the recipient of the award. The market value of the restricted shares is charged to income ratably over the period during which these awards vest. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provision of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), to stock-based employee compensation:

Three months ended September 30,	2005		2004
Net income (loss):
Reported net income (loss)	$	4,167	$	(3,204	)
Less: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		181		405
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects		—		80
Pro forma net income (loss)	$	3,986	$	(3,529	)
Basic earnings (loss) per share:
Reported basic earnings (loss) per share	$	0.30	$	(0.23	)
Pro forma basic earnings (loss) per share	$	0.29	$	(0.25	)
Diluted earnings (loss) per share:
Reported diluted earnings (loss) per share	$	0.30	$	(0.23	)
Pro forma diluted earnings (loss) per share	$	0.29	$	(0.25	)

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Nine months ended September 30,	2005		2004
Net income:
Reported net income	$	1,648	$	6,726
Less: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		611		1,010
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		32		80
Pro forma net income	$	1,069	$	5,796
Basic earnings per share:
Reported basic earnings per share	$	0.12	$	0.49
Pro forma basic earnings per share	$	0.08	$	0.42
Diluted earnings per share:
Reported diluted earnings per share	$	0.12	$	0.49
Pro forma diluted earnings per share	$	0.08	$	0.42

12. Derivatives

As of September 30, 2005, we had Interest Rate Protection Agreements for $25.0 million of our variable rate debt, and commodity contracts for 2,450,000 million British Thermal Units (MMBTUs) of natural gas, with a fair value of $13.2 million, accounted for under hedge accounting. The fair value of these derivatives is included in accrued liabilities and other assets on the Condensed Consolidated Balance Sheet for the Rate Agreements and commodity contracts, respectively. At September 30, 2004, we had Rate Agreements for $50.0 million of our variable rate debt and commodity contracts for 5,020,000 MMBTUs of natural gas.

We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate and natural gas hedges, as the counterparties are established financial institutions.

All of our derivatives qualify and are designated as cash flow hedges at September 30, 2005. Hedge accounting is applied only when the derivative is deemed to be highly effective at offsetting changes in anticipated cash flows of the hedged item or transaction. The ineffective portion of the change in the fair value of a derivative designated as a cash flow hedge is recognized in current earnings. In the third quarter of 2005, we recognized a gain of $0.5 million, which represented the total ineffectiveness of all cash flow hedges. During the third quarter of 2004, we recognized a gain of $0.03 million, which represented the total ineffectiveness of all cash flow hedges.

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13. Comprehensive Income

Components of comprehensive income are as follows:

Three months ended September 30,	2005			2004
Net income (loss)	$	4,167		$	(3,204	)
Change in fair value of derivative instruments (see detail below)		5,871			1,010
Effect of exchange rate fluctuation		(41	)		951
Comprehensive income (loss)	$	9,997		$	(1,243	)

Nine months ended September 30,	2005			2004
Net income	$	1,648		$	6,726
Change in fair value of derivative instruments (see detail below)		8,540			2,931
Effect of exchange rate fluctuation		(331	)		528
Comprehensive income	$	9,857		$	10,185

Accumulated other comprehensive loss (net of tax) includes:

	September 30, 2005			December 31, 2004			September 30, 2004
Minimum pension liability and intangible pension asset	$	27,594		$	27,594		$	22,080
Derivatives		(7,244	)		1,297			433
Exchange rate fluctuation		47			(285	)		(559	)
Total	$	20,397		$	28,606		$	21,954

The change in other comprehensive income for derivative instruments for the Company is as follows:

Three months ended September 30,	2005			2004
Change in fair value of derivative instruments	$	10,440		$	1,447
Less:
Income tax effect		(4,569	)		(437	)
Other comprehensive income related to derivatives	$	5,871		$	1,010

Nine months ended September 30,	2005			2004
Change in fair value of derivative instruments	$	14,719		$	4,869
Less:
Income tax effect		(6,179	)		(1,938	)
Other comprehensive income related to derivatives	$	8,540		$	2,931

14. Barter Transactions

We entered into a barter transaction during the first quarter of 2005, exchanging inventory with a net book value of $1.1 million for barter credits to be utilized on future purchased goods and services. During the second quarter of 2005, we wrote down the credits from $1.1 million to $0.4 million, reflecting our revised estimate of fair value. The write-down was a non-cash transaction. The net credits recorded of $0.4 million were recorded at the fair value of the inventory

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exchanged, net of fees, in accordance with EITF 93-11 “Accounting for Barter Transactions Involving Barter Credits” and are included in prepaid and other current assets in our Condensed Consolidated Balance Sheet.

Such barter credits are redeemable for a percentage of various goods and services negotiated with vendors. We regularly evaluate the recoverability of such assets and expect to utilize the fair value of the credits over the next twelve months.

15. Guarantees

The paragraphs below describe our guarantees, in accordance with Interpretation No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

The debt of Libbey Glass Inc. and Libbey Europe B.V, pursuant to the Amended and Restated Revolving Credit Agreement and the privately placed senior notes, is guaranteed by Libbey Inc. and by certain subsidiaries of Libbey Glass Inc. Also, Libbey Glass Inc. guarantees a€10 million working capital facility of Libbey Europe B.V. and Royal Leerdam. All are related parties that are included in the Condensed Consolidated Financial Statements. See Note 6 for further disclosure on the debt of Libbey.

In addition, Libbey Inc. guarantees the payment by Vitrocrisa of its obligation to purchase electricity. The guarantee is based on the provisions of a Power Purchase Agreement to which Vitrocrisa is a party. The guarantee is limited to 49% of any such obligation of Vitrocrisa and limited to an aggregate amount of $5.0 million. The guarantee was entered into in October 2000 and continues for 15 years from the initial date of electricity generation, which commenced on April 12, 2003.

In October 1995, Libbey Inc. guaranteed the obligations of Syracuse China Company and Libbey Canada Inc. under the Asset Purchase Agreement for the acquisition of Syracuse China. The guarantee is limited to $5.0 million and expires on the fifteenth anniversary of the Closing Date (October 10, 1995). The guarantee is in favor of The Pfaltzgraff Co., The Pfaltzgraff Outlet Co. and Syracuse China Company of Canada Ltd.

On April 2, 2004, Libbey Inc. and Libbey Glass Inc. guaranteed the obligations of Vitrocrisa Comercial, S. de R.L. de C.V. (Comercial) and Vitrocrisa under Tranche B loans pursuant to a Credit Agreement to which they are a party. Our portion of the guarantee is for 31% of the total $75 million Credit Agreement, up to a maximum amount of $23.0 million. At September 30, 2005, and December 31, 2004, the $23.0 million that was guaranteed by us was outstanding. The term of the Tranche B loans of the Credit Agreement is three years, expiring April 2007. We would be obligated to pay in the event of default by Comercial or Vitrocrisa, as outlined in the guarantee agreement. In exchange for the guarantee, we receive a fee. The guarantee was recorded during the second quarter of 2004 at the fair market value of $0.4 million in the Condensed Consolidated Balance Sheet as an increase in other long-term liabilities with an offset to investments.

In connection with our acquisition of Crisal-Cristalaria Automática, S.A. (Crisal), Libbey Inc. agreed to guarantee the payment, if and when such payment becomes due and payable, by Libbey Europe B.V. of the Earn-Out Payment, as defined in the Stock Promissory Sale and Purchase Agreement dated January 10, 2005, between Libbey Europe B.V., as purchaser, and VAA-Vista Alegre Atlantis SGPS, SA, as seller. The obligation of Libbey Europe B.V., and ultimately Libbey Inc., to pay the Earn-Out Payment (which is equal to 5.5 million euros) is contingent upon Crisal achieving certain targets relating to earnings before interest, taxes,

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depreciation and amortization and net sales. In no event will the Earn-Out Payment be due prior to the third anniversary of the closing date, which was January 10, 2005.

On March 30, 2005, Libbey Inc. entered into a guarantee pursuant to which it has guaranteed to BP Energy Company the obligation of Libbey Glass Inc. to pay for natural gas supplied by BP Energy Company to Libbey Glass Inc. Libbey Glass Inc. currently purchases natural gas from BP Energy Company under an agreement that expires on December 31, 2006. Libbey Inc.’s guarantee with respect to purchases by Libbey Glass Inc. under that agreement is limited to $3.0 million, including costs of collection, if any.

On July 29, 2005, Libbey Inc. entered into a guarantee for the benefit of FR Caddo Parish, LLC pursuant to which Libbey Inc. guarantees the payment and performance by Libbey Glass Inc. of its obligation under an Industrial Building Sublease Agreement with respect to the development of a new distribution center in Shreveport, Louisiana. The underlying lease is for a term of 20 years.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ from those anticipated in these forward-looking statements as a result of many factors. These factors are discussed under “Other Information” in the section “Qualitative and Quantitative Disclosures About Market Risk.”

Overview

During the first nine months of 2005, Libbey undertook several key strategic projects that will enhance our long-term financial performance. These key initiatives were as follows:

• In January 2005, we acquired 95 percent of the shares of Crisal-Cristalaria Automática S.A. (Crisal) located in Marinha Grande, Portugal. Crisal manufactures and markets glass tableware, mainly tumblers, stemware and glassware accessories. Royal Leerdam, acquired in 2002, and Crisal are complementary and key to our growth strategy to supply high-quality, machine-made glass tableware products to key markets worldwide.

• In February 2005, we ceased operations at our manufacturing facility in City of Industry, California, and realigned production among our other domestic glass manufacturing facilities.

• In June 2005, we reduced our North American salaried workforce by seven percent, or approximately 50 employees, in order to reduce our overall costs.

• Our capital spending during the first nine months of 2005 was $26.5 million, as we executed our plan to improve inspection techniques and further improve productivity in our factories.

• During the third quarter of 2005, we broke ground to begin construction of our new production facility in China. The facility is expected to be in production in early 2007.

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Results of Operations — Third Quarter 2005 compared with Third Quarter 2004

Dollars in thousands, except percentages and per-share amounts
							Variance
							In		In
Three months ended September 30,	2005			2004			dollars		percent
Net Sales	$	135,573		$	131,790		$	3,783		2.9	%
Gross profit	$	27,267		$	20,347		$	6,920		34.0	%
gross profit margin		20.1	%		15.4	%
Income (loss) from operations (IFO)	$	9,992		$	(1,172	)	$	11,164		952.6	%
IFO margin		7.4	%		(0.9	%)
Earnings (loss) before interest, income taxes and minority interest (EBIT)(1)	$	9,732		$	(1,608	)	$	11,340		705.2	%
EBIT margin		7.2	%		(1.2	%)
Earnings before interest, taxes, minority interest, depreciation and amortization (EBITDA)(1)	$	18,892		$	5,419		$	13,473		248.6	%
EBITDA margin		13.9	%		4.1	%
Net income (loss)	$	4,167			(3,204	)	$	7,371		230.1	%
net income margin		3.1	%		(2.4	%)
Diluted net income (loss) per share	$	0.30		$	(0.23	)	$	0.53		230.4	%

⁽¹⁾ We believe that Earnings before interest and taxes (EBIT) and Earnings before interest, taxes, depreciation and amortization (EBITDA), non-GAAP financial measures, are useful metrics for evaluating our financial performance because they provide a more complete understanding of the underlying results of our core business. See Table 1 below for a reconciliation of income before income taxes to EBIT and EBITDA.

For the quarter-ended September 30, 2005, sales increased 2.9 percent to $135.6 million from $131.8 million in the year-ago quarter. The increase in sales was attributable to the Crisal acquisition in Portugal and higher sales of foodservice glassware, Syracuse China, and Traex products. Sales to World Tableware customers were down slightly. Sales to retail and industrial glassware customers and Royal Leerdam customers were all down over eight percent, largely attributable to our earlier decision to discontinue the sale of low-margin products and softness in the European retail market.

We incurred special charges for the capacity realignment of $0.5 million during the third quarter of 2005 compared to $11.7 million during the year ago period. The table below summarizes the special charges for the three months ended September 30, 2005 and 2004. See Note 7 to the Condensed Consolidated Financial Statements and Table 2 below for more detail on these charges.

Three months ended September 30,	2005		2004
Cost of sales	$	—	$	5,986
Selling, general and administrative expenses		—		—
Special charges		487		5,748
Total special charges	$	487	$	11,734

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Gross profit was $27.3 million and 20.1 percent of sales in the third quarter of 2005, compared to $20.3 million and 15.4 percent of sales in the third quarter of 2004. Factors contributing to the increase, in addition to the lower special charges in the third quarter of 2005, were higher sales to foodservice glassware and dinnerware customers, lower warehouse and distribution expenses, and lower salaried labor costs. Partially offsetting these gains were higher natural gas costs and higher pension and postretirement medical expenses.

We recorded income from operations of $10.0 million in the third quarter of 2005 as compared to a loss from operations of $1.2 million in the year-ago period. The $11.2 million increase in income from operations is attributable to the increase in gross profit as previously discussed and a reduction of $5.3 million of special charges not included in gross profit offset by an increase in selling, general and administrative expenses as a result of the acquisition of Crisal.

Earnings before interest and income taxes (EBIT) were $9.7 million in the third quarter of 2005, compared to a loss of $1.6 million in the year-ago quarter. The increase in EBIT was a result of higher income from operations compared to the prior year period. See Table 1 below.

Net income for the third quarter of 2005 was $4.2 million, or 30 cents per diluted share, compared to a net loss of $3.2 million, or a loss of 23 cents per diluted share, in the year-ago period. Diluted earnings per share for the quarter, as detailed in Table 3 below, excluding special charges, were 32 cents per diluted share, as compared to 34 cents per diluted share in the prior year quarter.

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Results of Operations — First Nine Months 2005 compared with First Nine Months 2004

Dollars in thousands, except percentages and per-
share amounts							Variance
Nine months ended September 30,	2005			2004			In dollars			In percent
Net Sales	$	409,895		$	390,665		$	19,230			4.9	%
Gross profit	$	75,362		$	75,585		$	(223	)		(0.3	)%
gross profit margin		18.4	%		19.3	%
Income from operations (IFO)	$	12,572		$	19,587		$	(7,015	)		(35.8	)%
IFO margin		3.1	%		5.0	%
Earnings before interest and income taxes (EBIT)(1)	$	12,846		$	20,305		$	(7,459	)		(36.7	)%
EBIT margin		3.1	%		5.2	%
Earnings before interest, taxes, depreciation and amortization (EBITDA)(1)	$	38,457		$	42,775		$	(4,318	)		(10.1	)%
EBITDA margin		9.4	%		10.9	%
Net income	$	1,648		$	6,726		$	(5,078	)		(75.5	)%
net income margin		0.4	%		1.7	%
Diluted net income per share	$	0.12		$	0.49		$	(0.37	)		(75.5	)%

⁽¹⁾ We believe that Earnings before interest and taxes (EBIT) and Earnings before interest, taxes, depreciation and amortization (EBITDA), non-GAAP financial measures, are useful metrics for evaluating our financial performance because they provide a more complete understanding of the underlying results of our core business. See Table 1 below for a reconciliation of income before income taxes to EBIT and EBITDA.

For the nine months ended September 30, 2005, sales increased 4.9 percent to $409.9 million from $390.7 million in the year ago period. The increase in sales was attributable to the Crisal acquisition in Portugal and higher sales of World Tableware, Syracuse China and Traex products. Partially offsetting these increases were lower glassware shipments to foodservice, retail and industrial customers.

We incurred special charges for the capacity realignment of $9.9 million for the first nine months of 2005 compared to $11.7 million during the year ago period. The table below summarizes the special charges for the nine months ended September 30, 2005 and 2004. See Note 7 to the Condensed Consolidated Financial Statements and Table 2 below for more detail on these charges.

Nine months ended September 30,	2005		2004
Cost of sales	$	867	$	5,986
Selling, general and administrative expenses		1,347		—
Special charges		7,681		5,748
Total special charges	$	9,895	$	11,734

Gross profit was $75.4 million and 18.4 percent of sales in the first nine months of 2005, compared to $75.6 million and 19.3 percent of sales in the first nine months of 2004. The reduction in gross profit was caused by lower glassware sales to foodservice, retail and industrial customers, higher pension and postretirement medical expenses, and higher natural gas costs partially offset by a decrease in special charges from the year-ago period.

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We recorded income from operations of $12.6 million in the first nine months of 2005 compared to income from operations of $19.6 million in the year-ago period. The $7.0 million decrease in income from operations is primarily attributable to the decrease in gross profit as previously discussed, an increase of $3.3 million of special charges not included in gross profit and an increase in selling, general and administrative expenses as a result of the acquisition of Crisal.

Earnings before interest and income taxes (EBIT) were $12.8 million in the first nine months of 2005, compared to $20.3 million in the year-ago period. The reduced EBIT was a result of lower income from operations and a $0.5 million increase in equity loss from Vitrocrisa, compared to the prior year period. See Table 1 below.

Net income for the first nine months of 2005 was $1.6 million, or 12 cents per diluted share, compared to net income of $6.7 million, or 49 cents per diluted share, in the year-ago period. Diluted earnings per share for the first nine months of 2005, as detailed in Table 3 below, excluding special charges, were 60 cents per diluted share, as compared to 1.06 cents per diluted share in the first nine months of 2004.

Capital Resources and Liquidity

Working Capital

							Variance
Dollars in thousands, except	September 30,			December 31,			In		In
percentages, DSO, DIO, DPO, and DWC	2005			2004			dollars		percent
Accounts receivable	$	75,122		$	67,522		$	7,600		11.3	%
DSO(1)		47.3			45.2
Inventories		147,848			126,625			21,223		16.8	%
DIO(2)		94.8			84.8
Accounts payable		53,551			43,140			10,411		24.1	%
DPO(3)		32.5			28.9
Working capital(4)	$	169,419		$	151,007		$	18,412		12.2	%
DWC(5)		109.6			101.2
Percentage of LTM(6) net sales		30.0	%		27.7	%

(1)	Days sales outstanding (DSO) measures the number of days it takes to turn receivables into cash.
(2)	Days inventory outstanding (DIO) measures the number of days it takes to turn inventory into cash.
(3)	Days payable outstanding (DPO) measures the number of days it takes to pay the balances of our accounts payable.
(4)	Working capital is defined as inventories and accounts receivable less accounts payable. See Table 5 below.
(5)	Days working capital (DWC) measures the number of days it takes to turn our working capital into cash.
(6)	LTM — last twelve months.

Working capital was $169.4 million at September 30, 2005, which includes working capital associated with Crisal (acquired in January 2005) of $11.3 million. This is compared to working capital at December 31, 2004, of $151.0 million. Our working capital is higher at September 30, 2005, compared to December 31, 2004, due to the acquisition of Crisal and seasonal working capital requirements.

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							Variance
Dollars in thousands, except	September 30,			September 30,			In		In
percentages, DSO, DIO, DPO, and DWC	2005			2004			dollars		percent
Accounts receivable	$	75,122		$	66,863		$	8,259		12.4	%
DSO(1)		47.3			45.6
Inventories		147,848			141,366			6,482		4.6	%
DIO (2)		94.8			96.4
Accounts payable		53,551			39,594			13,957		35.3	%
DPO(3)		32.5			27.0
Working capital(4)	$	169,419		$	168,635		$	784		0.5	%
DWC(5)		109.6			115.1
Percentage of LTM(6) net sales		30.0	%		31.5	%

(1)	Days sales outstanding (DSO) measures the number of days it takes to turn receivables into cash.
(2)	Days inventory outstanding (DIO) measures the number of days it takes to turn inventory into cash.
(3)	Days payable outstanding (DPO) measures the number of days it takes to pay the balances of our accounts payable.
(4)	Working capital is defined as inventories and accounts receivable less accounts payable. See Table 5 below.
(5)	Days working capital (DWC) measures the number of days it takes to turn our working capital into cash.
(6)	LTM — last twelve months.

Working capital was $169.4 million at September 30, 2005 as compared to $168.6 million at September 30, 2004. However, excluding the $11.3 million of working capital associated with the Crisal business acquired in January of 2005, working capital was $10.5 million lower than at September 30, 2004, primarily as a result of the successful inventory control programs and higher accounts payable.

Cash Flow

Dollars in thousands, except percentages							Variance
							In			In
Three months ended September 30,	2005			2004			dollars			percent
Net cash provided by (used in) operating activities	$	1,255		$	(1,361	)	$	2,616			192.2	%
Capital expenditures		7,389			11,598			(4,209	)		(36.3	)%
Proceeds from asset sales and other		223			—			223			100.0	%
Dividends from equity investments		—			980			(980	)		(100.0	)%
Free cash flow(a)	$	(5,911	)	$	(11,979	)	$	6,068			50.7	%

^(a) We believe that Free Cash Flow (net cash provided by operating activities, less capital expenditures and acquisition and related costs plus proceeds from asset sales and dividends from equity investments), a non-GAAP financial measure, is a useful metric for evaluating our financial performance and it is used internally to assess performance. See Table 4 below.

Our net cash provided by operating activities was $1.3 million in the third quarter of 2005, compared to net cash used for operating activities of $1.4 million in the prior year quarter, or an increase of $2.6 million. The primary driver of the increased cash provided by operating activities was an increase in net income and a reduction in cash used for working capital requirements as discussed above. Our free cash flow was $(5.9) million during the third quarter of 2005 compared to $(12.0) in the prior year period, an increase of $6.1 million, mainly attributable to the change in net cash provided by operating activities, a decrease of capital expenditures of $4.2 million and dividends received in the prior year period of $1.0 million.

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Dollars in thousands, except percentages							Variance
							In			In
Nine months ended September 30,	2005			2004			dollars			percent
Net cash provided by operating activities	$	12,746		$	9,771		$	2,975			30.4	%
Capital expenditures		26,503			28,624			(2,121	)		(7.4	)%
Proceeds from asset sales and other		223			—			223			100.0	%
Dividends from equity investments		—			980			(980	)		(100.0	)%
Acquisitions and related costs		28,990			—			28,990			100.0	%
Free cash flow(a)	$	(42,524	)	$	(17,873	)	$	(24,651	)		(137.9	)%

^(a) We believe that Free Cash Flow (net cash provided by operating activities, less capital expenditures and acquisition and related costs plus proceeds from asset sales and dividends from equity investments), a non-GAAP financial measure, is a useful metric for evaluating our financial performance and it is used internally to assess performance. See Table 4 below.

Net cash provided by operating activities was $12.7 million during the first nine months of 2005, compared to $9.8 million during the year-ago period. The increase in cash provided by operating activities was due to a decrease in cash used for working capital as discussed above offset by a reduction of net income from the prior year period. Free cash flow was $24.7 million less than in the year-ago period primarily as the result of the acquisition of Crisal for $29.0 million in 2005.

Borrowings

The following table presents our total borrowings:

	Interest		September 30,		December 31,		September 30,
Dollars in thousands	Rate	Maturity Date	2005		2004		2004
Borrowings under credit facility	floating	June 24,2009	$	143,032	$	113,690	$	129,761
Senior notes	3.69%	March 31,2008		25,000		25,000		25,000
Senior notes	5.08%	March 31,2013		55,000		55,000		55,000
Senior notes	floating	March 31,2010		20,000		20,000		20,000
Promissory note	6.00%	September 2005 to September 2016		2,166		2,267		2,301
Notes payable	floating	September 2005		15,748		9,415		19,308
Obligations under capital leases	4.36%	September 2005 to May 2007		2,401		—		—
Other debt	4.00%	September 2009		2,087		—		—
Total borrowings			$	265,434	$	225,372	$	251,370

We had total borrowings of $265.4 million at September 30, 2005, compared to $225.4 million at December 31, 2004. The $40.0 million increase in debt is primarily attributable to the purchase of Crisal for $29 million in January 2005 and seasonal working capital needs.

Total borrowings increased $14.1 million from September 30, 2004, to September 30, 2005. The increase is primarily attributable to the purchase of Crisal as discussed above, partially offset by the impact of the devaluation of the euro on our euro-based debt during this period.

In June 2004, Libbey Glass Inc. and Libbey Europe B.V. entered into an Amended and Restated Revolving Credit Agreement (Revolving Credit Agreement or Agreement) with a group of banks that provided for an unsecured Revolving Credit and Swing Line Facility. The Agreement is

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further detailed in Note 6 to the Condensed Consolidated Financial Statements. The Agreement has a five-year term, maturing June 24, 2009. We had additional debt capacity at September 30, 2005, under the Revolving Credit Agreement of $43.5 million.

We issued $100 million of privately placed senior notes (Senior Notes) in March 2003. Eighty million dollars of the notes have an average interest rate of 4.65%, with an initial average maturity of 8.4 years and a remaining average maturity of 5.4 years. For further discussion of maturities, see the “Contractual Obligations” below. The remaining $20 million of the notes has a floating interest rate at a margin over the London Interbank Offer Rate (LIBOR). The floating interest rate on the $20 million debt at September 30, 2005, was 4.5%.

Of our total outstanding indebtedness, $158.3 million was subject to fluctuating interest rates at September 30, 2005. A change of one percent in such rates would have resulted in a change in interest expense of approximately $1.6 million on an annual basis as of September 30, 2005.

We have entered into Interest Rate Protection Agreements with respect to $25 million of our debt. The average fixed rate of interest under these Interest Rate Protection Agreements is 5.3%, and the total interest rate, including applicable fees, is 7.1%. The average maturity of these Interest Rate Protection Agreements was 0.9 years at September 30, 2005.

We believe that our free cash flow and available borrowings under the Revolving Credit Agreement, private placement senior notes and other short-term lines of credit will be sufficient to fund our operating requirements, capital expenditures, share repurchases, commitments and all other obligations (including debt service and dividends) throughout the remaining term of the Revolving Credit Agreement. We believe that the most strategic uses of our cash resources include strategic investments to further enhance our manufacturing and distribution processes, acquisitions, payment of debt principal and interest, and working capital requirements.

Some of the borrowings described above require maintenance of certain financial covenants. On September 30, 2005, as previously reported in our Form 8-K filed October 4, 2005, we amended the terms of our Revolving Credit Facility (Facility) and our Senior Notes. The amendments temporarily reduced the Facility from $250 million to $195 million for the period September 30 to December 30, 2005, and increased the leverage ratio covenants under both the Facility and the Senior Notes from 3.50 to 1.00 to 4.25 to 1.00 at September 30, 2005. The amendment also provided for the waiver by the lenders of the leverage ratio covenant for the period from October 1, 2005, to December 29, 2005. At December 30, 2005, the leverage ratio covenant will return to 3.50 to 1.00. Based upon our forecast for the fourth quarter 2005, we expect to have a leverage ratio in excess of 3.50 to 1. Because we currently do not have further waivers or amendments of, or commitments to refinance these agreements, the borrowings under these agreements are classified as short term at September 30, 2005. However, we expect to refinance or amend these agreements in the fourth quarter of 2005 and are in the process of pursuing such amendments or financing commitments.

Share Repurchase Program

Since mid-1998, we have repurchased 5,125,000 shares of our common stock for $140.7 million. As of September 30, 2005, we have Board authorization to purchase an additional 1,000,000 shares. No treasury shares were purchased during the third quarter of 2005. A portion of the repurchased common stock is being used by us to fund the Employee Stock Purchase Plan (ESPP) and the Company match contributions for our employee 401(k) plans.

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Contractual Obligations

Our long-term operating leases are reported in our 2004 Annual Report on Form 10-K. The long-term operating leases have not materially changed since the 2004 Form 10-K. Our obligations for debt and capital leases are listed below and further described in Note 6 to the Condensed Consolidated Financial Statements.

	Payments Due by Period
	Total		1 Year		2-3 Years		4-5 Years		After 5 Years
Capital leases	$	2,401	$	670	$	1,316	$	415		—
Debt	$	263,033	$	258,895	$	230	$	2,317	$	1,591

Some of our borrowings require maintenance of certain financial covenants. On September 30, 2005, as previously reported in our Form 8-K filed October 4, 2005, we amended the terms of our Revolving Credit Facility (Facility) and our Senior Notes. The amendments temporarily reduced the Facility from $250 million to $195 million for the period September 30 to December 30, 2005, and increased the leverage ratio covenants under both the Facility and the Senior Notes from 3.50 to 1.00 to 4.25 to 1.00 at September 30, 2005. The amendment also provided for the waiver by the lenders of the leverage ratio covenant for the period from October 1, 2005, to December 29, 2005. At December 30, 2005, the leverage ratio covenant will return to 3.50 to 1.00. Based upon our forecast for the fourth quarter 2005, we expect to have a leverage ratio in excess of 3.50 to 1. Because we currently do not have further waivers or amendments of, or commitments to refinance these agreements, the borrowings under these agreements are classified as short term at September 30, 2005. However, we expect to refinance or amend these agreements in the fourth quarter of 2005 and are in the process of pursuing such amendments or financing commitments.

In addition, we have commercial commitments for letters of credit and guarantees. Our letters of credit outstanding at September 30, 2005, totaled $8.4 million. For further detail with respect to our guarantees, see Note 15 to the Condensed Consolidated Financial Statements.

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Reconciliation of Non-GAAP Financial Measures

We sometimes refer to data derived from consolidated financial information but not required by GAAP to be presented in financial statements. Certain of these data are considered “non-GAAP financial measures” under Securities and Exchange Commission (SEC) Regulation G. We believe that non-GAAP data provide investors with a more complete understanding of underlying results in our core business and trends. In addition, it is the basis on which we internally assess performance, and certain non-GAAP measures are relevant to our determination of compliance with financial covenants included in our debt agreements. Although we believe that the non-GAAP financial measures presented enhance investors’ understanding of our business and performance, these non-GAAP measures should not be considered an alternative to GAAP.

Table 1

Reconciliation of Income before income taxes to EBIT and EBITDA

(Dollars in thousands)

	Three months ended September 30,					Nine months ended September 30,
	2005		2004			2005		2004
Income (loss) before income taxes	$	6,334	$	(4,783	)	$	2,606	$	10,038
Add: Interest expense		3,398		3,175			10,240		10,267
Earnings (loss) before interest and income taxes (EBIT)		9,732		(1,608	)		12,846		20,305
Add: Depreciation and amortization		9,160		7,027			25,611		22,470
Earnings before interest, taxes, depreciation and amortization (EBITDA)	$	18,892	$	5,419		$	38,457	$	42,775

Table 2

Summary of Special Charges

(Dollars in thousands)

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Capacity realignment:
Pension and postretirement welfare	$	—	$	4,080	$	—	$	4,080
Inventory write-down		—		1,906		—		1,906
Included in cost of sales		—		5,986		—		5,986
Fixed asset write-down		130		4,653		650		4,653
Severance & benefits		—		1,095		2,019		1,095
Miscellaneous		357		—		1,662		—
Included in special charges		487		5,748		4,331		5,748
Total pretax capacity realignment charges	$	487	$	11,734	$	4,331	$	11,734
Salary reduction program:
Pension & retiree welfare	$	—	$	—	$	867	$	—
Included in cost of sales		—		—		867		—
Pension & retiree welfare		—		—		1,347		—
Included in selling, general & administrative expenses		—		—		1,347		—
Employee termination costs		—		—		3,350		—
Included in special charges		—		—		3,350		—
Total pretax salary reduction program	$	—	$	—	$	5,564	$	—
Total special charges	$	487	$	11,734	$	9,895	$	11,734

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Table 3

Reconciliation of Non-GAAP Financial Measures for Special Charges

(Dollars in thousands except per-share amounts)

	Three months ended September 30,					Nine months ended September 30,
	2005		2004			2005		2004
Reported net income (loss)	$	4,167	$	(3,204	)	$	1,648	$	6,726
Special charges — net of tax		326		7,862			6,630		7,862
Net income excluding special charges	$	4,493	$	4,658		$	8,278	$	14,588
Diluted earnings (loss) per share:
Reported net income (loss)	$	0.30	$	(0.23	)	$	0.12	$	0.49
Special charges — net of tax		0.02		0.57			0.48		0.57
Net income per diluted share excluding special charges	$	0.32	$	0.34		$	0.60	$	1.06

Table 4

Reconciliation of net cash provided by operating activities to free cash flow

(Dollars in thousands)

	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Net cash provided by (used in) operating activities	$	1,255		$	(1,361	)	$	12,746		$	9,771
Less:
Capital expenditures		7,389			11,598			26,503			28,624
Acquisition and related costs		—			—			28,990			—
Proceeds from asset sales and other		223			—			223			—
Dividends from equity investments		—			980			—			980
Free cash flow	$	(5,911	)	$	(11,979	)	$	(42,524	)	$	(17,873	)

Table 5

Reconciliation of working capital

(Dollars in thousands)

	September 30, 2005		December 31, 2004		September 30, 2004
Accounts receivable	$	75,122	$	67,522	$	66,863
Plus:
Inventories		147,848		126,625		141,366
Less:
Accounts payable		53,551		43,140		39,594
Working capital	$	169,419	$	151,007	$	168,635

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Item 3. Qualitative and Quantitative Disclosures about Market Risk

Currency

We are exposed to market risks due to changes in currency values, although the majority of our revenues and expenses are denominated in the U.S. dollar. The currency market risks include devaluations and other major currency fluctuations relative to the U.S. dollar, euro or Mexican peso that could reduce the cost competitiveness of our products or those of Vitrocrisa compared to foreign competition and the impact of exchange rate changes in the Mexican peso relative to the U.S. dollar on the earnings of Vitrocrisa expressed under accounting principles generally accepted in the United States.

Interest Rates

We are exposed to market risk associated with changes in interest rates in the U.S. and have entered into Interest Rate Protection Agreements (Rate Agreements) with respect to $25 million of debt as a means to manage our exposure to fluctuating interest rates. The Rate Agreements effectively convert $25 million of our long-term borrowings from variable rate debt to fixed-rate debt, thus reducing the impact of interest rate changes on future income. The average fixed rate of interest for our borrowings related to the Rate Agreements at September 30, 2005, excluding applicable fees, was 5.3% per year, and the total interest rate, including applicable fees, was 7.1% per year. The average maturity of these Rate Agreements was 0.9 years at September 30, 2005. Debt not covered by the Rate Agreements has fluctuating interest rates with a weighted average rate of 4.2% per year at September 30, 2005. We had $158.3 million of debt subject to fluctuating interest rates at September 30, 2005. A change of one percentage point in such rates would result in a change in interest expense of approximately $1.6 million on an annual basis as of September 30, 2005. If the counterparties to these Rate Agreements were to fail to perform, these Rate Agreements would no longer protect us from interest rate fluctuations. However, we do not anticipate nonperformance by the counterparties.

Natural Gas

We are also exposed to market risks associated with changes in the price of natural gas. We use commodity futures contracts related to forecasted future natural gas requirements of our domestic manufacturing operations. The objective of these futures contracts is to limit the fluctuations in prices paid and potential losses in earnings or cash flows from adverse price movements in the underlying natural gas commodity. We consider our forecasted natural gas requirements of our domestic manufacturing operations in determining the quantity of natural gas to hedge. We combine the forecasts with historical observations to establish the percentage of forecast eligible to be hedged, typically ranging from 40% to 60% of our anticipated requirements, generally six or more months in the future, with smaller quantities hedged beyond this time frame. For our natural gas requirements that are not hedged, we are subject to changes in the price of natural gas, which affects our earnings.

Pension

We are exposed to market risks associated with changes in the various capital markets. Changes in long-term interest rates affect the discount rate that is used to measure our pension benefit obligations and related pension expense. Changes in the equity and debt securities markets affect the performance of our pension plan asset performance and related pension expense.

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Other Information

This document contains statements that are not historical facts and constitute projections, forecasts or forward-looking statements. These forward-looking statements reflect only our best assessment at this time, and may be identified by the use of words or phrases such as “anticipate,” “believe,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” “would” or similar phrases. Such forward-looking statements involve risks and uncertainty; actual results may differ materially from such statements, and undue reliance should not be placed on such statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason. Important factors potentially affecting our performance include, but are not limited to:

• major slowdowns in the retail, travel, restaurant and bar or entertainment industries, including the impact of armed hostilities or any other international or national calamity, including any act of terrorism, on the retail, travel, restaurant and bar or entertainment industries;

• significant increases in interest rates that increase our borrowing costs;

• significant increases in per-unit costs for natural gas, electricity, corrugated packaging, aragonite, resins and other purchased materials;

• increases in expenses associated with higher medical costs, increased pension expense associated with lower returns on pension investments and lower interest rates on pension obligations;

• currency fluctuations relative to the U.S. dollar, euro or Mexican peso that could reduce the cost competitiveness of our or Vitrocrisa’s products compared to foreign competition;

• the effect of high inflation in Mexico on the operating results and cash flows of Vitrocrisa;

• the impact of exchange rate changes in the Mexican peso relative to the U.S. dollar on the earnings of Vitrocrisa expressed under accounting principles generally accepted in the United States;

• the inability to achieve savings and profit improvements at targeted levels at Libbey and Vitrocrisa from capacity realignment, re-engineering and operational restructuring programs or within the intended time periods;

• protracted work stoppages related to collective bargaining agreements;

• increased competition from foreign suppliers endeavoring to sell glass tableware in the United States, Mexico, Europe and other key markets worldwide, including the impact of lower duties for imported products; and

• whether we complete any significant acquisitions and whether such acquisitions can operate profitably.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”) reports are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the

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cost-benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

	Total				Total Number of Shares		Maximum Number of
	Number of		Average		Purchased as Part of		Shares that May Yet Be
	Shares		Price Paid		Publicly Announced		Purchased Under the
Period	Purchased		per Share		Plans or Programs		Plans or Programs(1)
July 1 to July 31, 2005		—		—		—		1,000,000
August 1 to August 31, 2005		—		—		—		1,000,000
September 1 to September 30, 2005		—		—		—		1,000,000
Total		—		—		—		1,000,000

^{(1) We announced on December 10, 2002, that our Board of Directors authorized the purchase of up to 2,500,000 shares of our common stock in the open market and through negotiated purchases. The timing of the purchases will depend on financial and market conditions. There is no expiration date for this plan.}

Item 5. Other Information

(b) There has been no material change to the procedures by which security holders may recommend nominees to the Company’s board of directors.

Item 6. Exhibits

Exhibits: The exhibits listed in the accompanying “Exhibit Index” are filed as part of this report.

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EXHIBIT INDEX

Exhibit
Number		Description
	3.1	Restated Certificate of Incorporation of Libbey Inc. (filed as Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference).
	3.2	Amended and Restated By-Laws of Libbey Inc. (filed as Exhibit 3.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference).
	4.1	Restated Certificate of Incorporation of Libbey Inc. (incorporated by reference herein as Exhibit 3.1).
	4.2	Amended and Restated By-Laws of Libbey Inc. (incorporated by reference herein as Exhibit 3.2).
	10.1	Amendment No. 2 and Waiver to Credit Agreement dated September 30, 2005, among Libbey Glass Inc. and Libbey Europe B.V., to amend its Credit Agreement, dated June 24, 2004, as the borrowers, the Bank of America, N.A., as the Administrative Agent, Swing Line Lender and as an L/C Issuer, the Bank of New York, as the Syndication Agent, The Bank of Tokyo-Mitsubishi, Ltd., Chicago Branch, as the Documentation Agent, and other lenders listed therein (filed herein).
	10.2	Amendment, dated September 30, 2005, with respect to the Note Purchase Agreement and Guaranty Agreement, both dated March 31, 2003, among Libbey Glass Inc. and the Purchasers of the notes (filed herein).
	10.3	Waiver on September 30, 2005, by the Tranche B Lenders party to the Credit Agreement, dated April 2, 2004, among Vitrocrisa Comercial, S. de R.L. de C.V., Vitrocrisa, S. de R.L. de C.V., the lenders party thereto and Bank of Montreal, as the Administrative Agent among Libbey Inc. and Libbey Glass Inc (filed herein).
	31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) (filed herein).
	31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) (filed herein).
	32.1	Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herein).
	32.2	Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herein).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LIBBEY INC.
DateNovember 9, 2005	By	/s/ Scott M. Sellick
		Scott M. Sellick,
		Vice President, Chief Financial Officer (duly authorized principal financial officer)

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